DBRS Confirms Abanca’s ratings at BBB (low), Trend Changed to Positive

DBRS Ratings Limited (DBRS) has confirmed Abanca Corporación Bancaria, SA.’s (Abanca or the Group) ratings, including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Trend on all ratings has been changed to Positive. The Bank’s Intrinsic Assessment (IA) remains at BBB (low) and the support assessment remains SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings and the change of Trend to Positive reflects Abanca’s progress in improving core revenues and reducing non-performing assets (NPAs) in the last two years. In particular, Abanca has managed to consistently grow net interest income (NII) through new lending growth, and despite the ongoing pressure from the low interest rate environment. Moreover, the bank has been successful in diversifying revenues away from NII through commission growth, which partly reflects the different small business acquisitions in the past two years. The rating action also considers the improvement in asset quality with the Group’s non-performing loans (NPL) ratio already at similar levels to the European bank average. The ratings continue to reflect Abanca’s franchise strength in its home region of Galicia, the Bank’s sound funding, liquidity and capital positions as well as its high cost/income ratio, which remains higher than most domestic peers despite the core revenue growth.

DBRS continues to monitor the developments with regard to Abanca’s sole shareholder in relation to some of its Venezuelan businesses. However, DBRS understands this should not have a material impact in the near term on Abanca, given the separation between the bank and the shareholder’s interests in Venezuela.

RATING DRIVERS
Further positive ratings pressure could arise if Abanca demonstrates a longer track record of consistently growing core revenues whilst maintaining good cost discipline.

Negative rating pressure on the ratings could arise from a material deterioration of capital levels.

RATING RATIONALE
Abanca’s ratings are underpinned by its well-established regional franchise in Galicia, where it maintains leading market shares of around 40% for loans and deposits. The Bank has made a number of acquisitions in the last three years, largely focused on insurance, mutual funds and consumer finance, and more recently, announced the acquisition of the private and commercial client business of Deutsche Bank PCC Portugal. This should further reinforce its asset management activities and boost commission income.

Abanca’s 2017 and 1Q18 results continued to be driven by core revenue growth and low levels of provisions for loans and other assets. Although trading gains from the sale of different sovereign portfolios and equity stakes have supported results in recent years, DBRS notes that these are now much lower than in the past. NII has shown an upward trend in recent quarters, and commissions are also growing quarter-on-quarter, helped by the acquisitions that have enabled the bank to further grow fees from insurance and off-balance sheet products. Abanca reported net attributable income of EUR 367.1 million in 2017, up 10% year-on-year (YoY), driven by the improvement in NII, and a one-off gain on the sale of Compañía Logística de Hidrocarburos (CLH) in 1Q17. In 1Q18, the Bank reported net attributable income of EUR 155.3 million, a similar figure to 1Q17, but supported by core revenue growth. Abanca has a high cost-to-income ratio compared to domestic peers. In 1Q18 the ratio remained high at 50.9% (2017: 68.9%, 2016: 79.2%, as calculated by DBRS), however, DBRS expects this to further improve helped by the growth of revenues.

Abanca’s asset quality has consistently improved since 2014 primarily through the reduction of NPLs. DBRS expects Abanca to continue to further improve its asset quality on the back of the good economic and property market conditions in Spain and the Group’s home regions. Abanca has also reduced its NPAs, with these reducing by 23.8% from end-2016 to end-1Q18, bringing the NPA ratio in the period from 11.0% to 8.0% (as calculated by DBRS). Abanca’s NPL ratio (as calculated by DBRS) stood at 5.0% at end-March 2018, a ratio that is similar to the European bank average, and which is better than most domestic peers. DBRS, however, notes that the bank has not achieved a significant reduction of foreclosed assets to date, although recognises that the stock of FAs is lower than seen at most domestic peers.

Abanca’s funding and liquidity position is supported by its large and resilient customer deposit base and ample pool of unused liquid assets. However, and unlike its comparable domestic peers, Abanca’s access to wholesale markets for additional funding has not been tested since 2010. Highlighting its strong franchise in Galicia, customer deposits were up 2.9% YoY in 1Q18 and a further 5.8% in 2017. The bank has a sound net loan-to-deposit ratio (LTD, excluding repos and covered bonds included in deposits, as calculated by DBRS) of 91.7% at end-March 2018.

DBRS views Abanca’s capital position as sound, supported by a Common Equity Tier 1 (CET1) ratio (phased-in) that remained at 15.6% at end-1Q18 (14.9% (fully loaded)), one of the strongest among Spanish banks. The total capital ratio (phased-in) was similar to its CET1 (phased-in) ratio at that date, as the Bank has not issued AT1 or Tier 2 instruments. The total capital ratio is well above minimum total capital requirements with an excess of around 419 bps above the minimum requirement at end-1Q18.

The Grid Summary Grades for Abanca Corporación Bancaria, SA are as follows: Franchise Strength – Good/Moderate; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company documents, Bank of Spain and the European Banking Authority (EBA). DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve-month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Maria Rivas – Vice President – Global FIG
Rating Committee Chair: Ross Abercromby – Managing Director – Global FIG
Initial Rating Date: December 10, 2014
Last Rating Date: July 26, 2017

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